Omitted Variable Bias and Suppressor Variables

Regression · Hard · Free problem
You have two OLS regressions on the same dataset: - **Model 1:** $Y = b_1 X_1 + \epsilon$ (simple regression) - **Model 2:** $Y = b_2 X_1 + \beta_2 X_2 + \epsilon$ (multiple regression) You are told that $\text{corr}(X_1, X_2) > 0$ and $\text{corr}(Y, X_2) = 0$. Which coefficient is larger, $b_1$ or $b_2$? Prove it.

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